If you want to get into the real estate investing business but don’t know how, this post is for you.
It’s easy to be overwhelmed before you start investing in real estate and being a landlord. You’re dealing with a lot of unknowns.
I’ve pulled together 7 steps to help you get started in real estate investing:
1. Write down your goals
Be specific. Don’t have a goal like “make a million dollars.”
I have two main goals in my business:
- Make $300/per door/per month in cash flow (after all expenses and savings for CapEx).
- Buy at least one property a year.
My overarching goal is to retire on $8,000 per month. In order to retire on my rental properties, I need only need 27 units, producing $300/month, to be able to retire on that passive rental income.
To accomplish this, I set S.M.A.R.T. goals:
Here is an example of a S.M.A.R.T. real estate investing goal: Gross $100,000 in the next year by brokering 10 foreclosure transactions valued at $10k a piece.
2. Pick the type of property to invest in
There are many options when getting started as a new landlord. Do you want residential real estate, single-family residential, or multifamily?
There are certainly significant pros and cons for the two types of properties – this infographic shows the differences: Single Family versus Multifamily Real Estate Investing Infographic
3. Find out your financial requirements
Interview lenders to understand what you need to buy a rental property. It’s important to find out what lenders want to lend on the type of property you plan to buy.
Many real estate investors get a deal and then scramble to find financing. But, it’s better to secure financing first and then look for a deal.
If you can’t get funding from a traditional lender, try using a private lender. Private lenders are individuals with cash that will lend to real estate investors. Because this is a private transaction, there are literally hundreds of ways to structure this deal. Private lenders typically charge a high interest rate because of the increase in the risk.
4. Get a partner (optional)
You might want to talk with other real estate investors about forming a joint venture with them. They can put up the money, and you make a percentage of the profit each month. What you’d do for them would be to find a great deal, manage renovations, get a quality tenant, and manage the property.
You won’t make nearly as much money as you could if you owned the property, but you won’t have to put up any of your own cash or take on debt. This method gains you great experience with real estate investing.
5. Choose a location
Where do you plan to buy property? Make sure you have researched the area as much as you can. Look for the following:
- Taxes — Property taxes differ, sometimes even within the same county. Research this before you invest.
- School districts — It’s always best to be in a good school district. And most families with kids prefer single-family houses.
- Demographic trends — Demographic trends are probably the single most important factor when looking at the appreciation of real estate. Think about the population growth of Austin, TX, versus Detroit, MI.
- Rent rates — Check Craigslist for similar properties, and talk with at least two property management companies about rent rates. You can also check out this post for researching rental comps.
- Public transportation — This is very important if you plan on investing in the city. Tenants in the city want access to public transportation.
- Internet options — Know who provides internet to a property before you complete a contract.
These are all factors you need to consider when investing in real estate. If you don’t weigh them carefully, you’ll buy a bad deal.
6. Search for a property
How exactly do you plan on finding good deals?
Below are some options:
- Real estate agent — Using an agent is the most traditional way to find deals. If you go this route, make sure you use an agent who specializes in investment property in your areas of interest. Otherwise, they can waste your time showing you properties you don’t want. On the MLS look for keywords like seller financing or handyman special for good deals.
- Craigslist — This is a great place to find both on-market deals and off-market deals.
- Drive around — This might seem old school, but you can find a lot of good deals just by driving around looking for “For Sale By Owner” signs.
- Tax-delinquent list — You need to spend a lot of time working with the sellers and their bank to negotiate a short sale.
- Old-fashioned Mailers – Send out “handwritten” letters to other rental owners in your target area. Tell them that you’d like to buy their property, and if they are interested, invite them to call you.
7. Make offers
This is where the rubber meets the road and a lot of investors stop. It’s easy to research and get stuck in “analysis paralysis,” but nothing will happen unless you make an offer. Don’t be embarrassed to make a low offer. The worst that could happen is the seller will turn it down.
If your offer is accepted, have an inspection contingency. That way, if you need to back out for quality issues, you can.
In the next installment of this series, I discuss what to do after you get a contract signed, I’ll also provide an essential checklist to make your life easier. Check out How to Get Started in Real Estate Investing: Part 2